Friday, May 18, 2007

If you'll have a gander at my latest net worth update, you'll see I have about $100,000 in equities. Nothing to sneeze at, but nothing to write home about. To get to $1 million, I have to multiply that pile of money by 10. I have some work to do!

One of my credos that I will repeat until I'm blue in the face is to stay diversified, and I define diversification as not having any one position in my portfolio comprise more than 5% of my holdings. My two exceptions are my real estate, and my S&P 500 index funds - two safe risks, in my opinion.

Because of my 5% rule, I own alot of stocks. And since I don't have alot of money to invest, the positions I usually take in stocks are small. I own $4,000 of some companies, $300 of other companies. If I'm not sure about a particular stock, I will open up a $300-500 position. I pay $9.99 per trade, and I'm not concerned with this. If my stock doubles, that $10 is nothing in the grand scheme of things. And I have 21 stocks that are up 25% or more in the past year. I paid $209.79 to get into those 21 stocks. That's worth it to me.

Now, because I'm buying small positions, I'm not buying alot of shares. If a stock is at $30, and I'm buying $300 worth, I'm buying a measly 10 shares. The question is: With a long term hold strategy, and with the small amount of shares I'm buying, does the price paid for the shares really matter? I mean, if I pay $32 per share instead of $30, is that a big deal?

My answer is: YES! Here's why: Buying stocks is a learning process for me. I find a company I like, and I review its 1-month, 3-month, 1-year, 2-year, and 5-year charts. I try to determine what I'd like my entry point to be. And then I stick to it. I decide what I want to pay for the stock, and then I do not deviate from that decision. But why bother when it's only a few extra bucks here and there to buy the stocks I want?

I might only have $100,000 now, but I might (will!) be in control of $1 million, maybe $2 million some day. Instead of buying 10 shares of a stock, I'll be buying 1,000 shares. When purchasing 10 shares at $32 instead of $30, I paid an extra $20, but I really paid 6.7% more than I should have. When it comes time to buying 1,000 shares, it's the same 6.7%, but now my overpayment is $2,000! By sticking to my guns now, by keeping my emotions out of the equation (buy now before it's too late!), I am training myself to not only buy stocks at the right price, but to avoid jumping in at the wrong price.

So even a 50 cent spread is a big deal, no matter how many shares you're buying. Train yourself to act with discipline now when you're not throwing alot of money around, and you'll be well prepared to handle greater amounts in the future.